Calculating savings for an automation project is not as simple as payback, things to consider include, direct and indirect labor, maintenance, CAPEX, OPEX, materials, inflation; with this presentation you should be able to decide how to calculate the ROI of the project and get the budget to make it happen.
- Learn what are the hidden costs of an automation project
- Learn about the differences between hard and soft savings
- Learn to calculate the most accurate ROI possible for an automation project
Have you ever calculated the financials of an automation project and then been heavily rejected by the CFO or receive complaints from some of the team members that are extra expensive they have to execute? I have been there. So let me help you get it right on your first try.
Hello, welcome to the payback period calculation for an automation project. I am Enrique Morales and I will be your host today.
You probably don’t know me, and that’s fine. But let me introduce myself. I love automation. It all started after college, I landed a job as a maintenance engineer and getting bold really quick on automation projects. Then I began my controllogix later noun product engineer. And after joining Honeywell like five years ago, I became a product manager for APIs and eventually moved to 100% automation. Let’s start by defining what I will be calling quick payback and fully analyze payback. Quick payback is a simple general calculation of costs divided by the annual savings. And I am calling me quick because we are just calculating the cost of a project. Let’s say you want to have a machine that is going to cost $2 million. And you say you are going to be saving $400,000 a year, it’s to be like it’s going to be five years. Okay? So that’s quick, and you can use it for let’s say, let’s just start the project. You go with your boss, your security officer, and say you know what this machine is going to cost $2 million, it is going to pay by itself in five years. That’s how you use a quick payback. But it’s not accurate. We all know that. So that’s why we need to calculate a full analysis often artful analysis, payback. And that’s what’s going to be discussing today we’re going to be talking about hidden costs, indirect like in the labor, negative expenses, materials, and hidden savings as well like attrition and inflation. The full analysis payback is used for calculating the exact costs and savings of the machine. And that’s what you’re going to be presenting when you launch the project for real to your leaders. But before moving on to the main topic, let’s discuss one more thing. Funding with CAPEX or OPEX. CAPEX are major purchases a company makes are designed to be used over the long term. And optics are the day-to-day expenses a company incurs to keep its business operational. They will have different ways of impacting your business financial numbers, but we’re not here to discuss taxes. So most of the automation projects will fi will fall under the capital category. This is how most if not all of them are automation companies for their projects. This is mostly beneficial for long term projects. So this is what I will cover today. Keep in mind that there are a handful of companies starting to offer objects as a way way to acquire their solutions. At some point, this is something that you will have to discuss internally to see if this is something that will work for your organization. Currently, all our projects are funded as cabinets these making in the future. But our consensus at this moment is that optics is beneficial for short lived brothers and not for long term projects. Okay. The biggest expense helpfully is the cost of your solution, followed by depreciation and also consider maintenance costs. At this point, it seems very easy to remember but well Don’t forget to include spare parts, machine transportation facilities, they have changes in direct labor, life expenses and material. At this point in time, you will need to remember that we have increased demand for electronics and plastic vessels. So material might be scarce. And your project will need considerable amount of material for at least four stages in the project during liquidation because you will need to send samples to your vendors. And also they will require additional parts to send to their vendors in order to quote a certain field or something
And also you will also need materials for when the break starts, you will need a lot of material at this point,
but nothing will be compared to the quantities required for the book in the machine. What is closer to completion and the quantities required for validating the machine, you will need to validate the machine thoroughly. And for that, you will need to send a lot of material to your vendor. By a lot we’re talking 1000s of pieces. And some of these material may be recordable. But most of them is not going to be recoverable it’s going to be scrapped. So consider that another hidden cost might be labor transferred to a different process. Sometimes the vendors suggest placing the material in special containers. And when you replace the labor, that’s going to be certain material in your process. But you will have to transfer that labor to the process of certain material to put it in those containers, and some other different things that will be done by the hidden labor, like researching material, or changing the package the packaging. It all adds to the automation costs. So you may receive a probe at this point and material in bulk. And someone suggest to use a different packaging, it’s gonna cost you to consider that as well. So savings here we have two rows for FBA products and sustaining pros. Let’s review sustaining first. Direct Labor, it can be identified basically, you calculate how many people the machine is going to save. And you know how much delay what you’re going to be saying. Also consider indirect labor, sometimes there’s people checking the product are repairing it, you need to consider them as well. And don’t forget the cost of poor quality, you can identify that easily scrap production losses due to transportation and stuff. So that’s easily identifiable. And here the savings to consider are direct labor that will not be required when demand increases. So let’s say your machine is capable of producing 2 million pieces. And at this moment, you’re only losing 2 million, you have a hefty amount of brothers that you will be able to produce with a machine without hiring people. So that’s also savings. And you will also save the equipment required to produce that extra million units man. What else salary inflation and additional expenses in addition is high in the in regions like Mexico, where I’m based, and the cost of high new labor should be included in the calculation as well. So MPI savings are funding consider the same savings as sustaining and it can also be funded to increase capacity. Sustaining products have small growth curves. However, MPs have exponential curves, and then a stated demand. So once product sales hit the top, it is for the reason that a well planned automation project can respond faster to this curve when demand increases. So let’s have an example. Let’s say your solution custom million, you will need probably an indirect labor increase of 50k. Because you will need an engineer or a technician. And then and then making all these numbers. I’m not based on any costs, I’m just doing the costs for the sake of the example. Then for a two minute break, you may need 10k a year for maintenance. And you have right now 60 people on your manual labor. So after automation, you are going to have only 10 people, you’re going to be cutting a net save of 50 direct labor personnel. Assuming a cost of 11.7k. That’s roughly $5 per hour per operator. And demand increase of 5% a year and inflation 5% a year. I use a percent because it’s easy. And that’s Every time you lose an employee, hiring it cost $500, that’s going to be our example.
You will be able to see over here in our financial sheet, all the information, the cost of the solution is 2 million on year one. And then you’re going to have to hire 50k indirect labor personnel. And you’re going to be paying that for, in this case, 10 years, the maintenance is going to start happening at the second year, and it’s going to be $10,000. And over here, this row, you can add your material and different stuff. But this tool does not have the option to select What’s this topic, so I didn’t want to confuse you. But if you go here, you can also add those expenses. Over here, your labor savings, this is 50 times 11.7k. And it’s going to calculate the inflation, okay are here. Then, since we have a 5% growth every year in operators, well, in demand, we assume it’s 5% increase in operators as well. So you’re going to have to hire over here, in this case, it’s like three operators, then three and a half, and so on. And you’re going to save due to attrition, which is going to be high on this because we have a very high attrition is going to be 500 per person. So we also consider this and it’s going to be impacted by the amount of operators that are increased due to the demand. And this is how the two are to calculated, the cost of savings is going to increase every year due to inflation. If we compare this to the previous one, we have $505,000 over here, and now the two inflation, which is 5% a year it goes high. So if you calculate it, you you’re going to be short in your payback period calculation. And every year is 5% extra. So in the end is going to be 1 million in 10 years, compared to $164,000. The depreciation I set up a 10 year depreciation period. But you will have to choose what your finance team tell you, we usually use 710 and 12 depending of what kind of women it is.
So this is the gross profit. And what else Finally, our calculation after this, solving all these items have the formula. So if I have, I will help you understand a little bit better.
But after taxes and stuff, depreciation, and all the expenses that we have are here we have a payback period of 4.2 years. These will be higher within use inflation, if we didn’t use the avoided cost of future labor. And the attrition cost as you can see, all adds up. And in this case, a payback period is 4.2 years. Look at the example I did but we have projects that we have been able to move from three and a half years to 2.9 years which is much better and easier to sell to our financial team. Automation savings are complex for when they are calculated correctly. They leave no room for error. Thank you for staying here to the end. We appreciate it. If you need any help or questions, don’t hesitate to post them on the platform or contact me on LinkedIn when I say thank you very much
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